1. Economic Systems

2. Chapter 2: Economic Systems
KEY CONCEPT
An economic system is the way in which a society uses its resources to satisfy its people’s unlimited wants.
WHY THE CONCEPT MATTERS
An economic system determines what to produce, how to produce, and for whom to produce. Countries have mixed systems, but some systems give more economic and political freedom and create more wealth than others.

3. Types of Economic Systems
Introduction to Economic Systems
Types of Economic Systems
KEY CONCEPTS
Economic system—how society uses resources to satisfy people’s wants
Three basic systems: traditional, command, and market economies
Mixed economies have features of more than one type of system

4. Types of Economic Systems
TYPE 1: Traditional Economy
Traditional economy centers on families, clans, or tribes
decisions are based on customs and beliefs
Everyone has a set role; no chance of deviating from pattern
Good of the group always comes before individual desires

5. Types of Economic Systems
TYPE 2: Command Economy
Command economy—government makes economic decisions
determines what to produce; how to produce; who gets products
Wants of individual consumers rarely considered
Government owns means of production: resources and factories

6. Types of Economic Systems
TYPE 3: Market Economy
Market economy driven by choices of consumers and producers
consumers spend money, go into business, sell their labor as they wish
producers decide how to use their resources to make the most money
Consumers, producers benefit each other when they act in self-interest

7. Characteristics of Traditional Economies
KEY CONCEPTS
Early societies all had traditional economies
Traditional systems help societies survive
Tend to be inefficient; do not adapt to change

8. Characteristics of Traditional Economies
TRAIT 1: Advantages and Disadvantages
Advantages: little disagreement over goals, roles
methods of production, distribution determined by custom
Disadvantages: as result of resistance to change, less productive
do not use new methods; people not in jobs they are best suited for
low productivity results in low standard of living

9. Characteristics of Traditional Economies
TRAIT 2: Under Pressure to Change
Many traditional economies under pressure to change
Kavango people of Namibia lived as subsistence farmers for centuries
Modern telecommunications brought Kavango images of outside world
thousands have moved to cities
a few have turned to commercial farming

10. Reviewing Key Concepts
Use each of the terms in a sentence:
traditional economy
command economy
market economy

11. Command Economies Government Controls KEY CONCEPTS
Centrally planned economy—central government makes all decisions
Decides for whom to produce in part by setting wages
only some people have money to buy available products

12. Government Controls EXAMPLE: Government Planning
In all societies, government exerts some control over people’s lives
In centrally planned economy, government exerts great control
determines businesses to operate, amount produced each month
determines who is employed, work hours, pay scales

13. Government Controls EXAMPLE: Socialism and Communism
Karl Marx influenced some societies to adopt command economies
socialism—government owns some of the factors of production
communism—no private property; little political freedom
Authoritarian system requires total obedience to government
communism is authoritarian socialism

14. Government Controls EXAMPLE: Socialism and Communism
Democratic socialism established under democratic political process
government owns basic industries
other industries private
central planners make decisions for government-owned industries
central planners might control other sectors, such as health care

15. Karl Marx: Economic Revolutionary
A New View of Economics
Marx lived during Industrial Revolution
Argued factory owners used workers as resource
exploited workers by keeping wages low to increase profits
workers would rebel, establish classless society
Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital

16. Command Economies Today
KEY CONCEPTS
No pure command economies today
modern telecommunications bringing about change
Some economies still have mostly command elements

17. Command Economies Today
North Korea
Communist North Korea used resources for military, not necessities
built large army; nuclear weapons program
In 1990s and early 2000s, millions died of hunger, malnutrition
In 1990s, production decreased and economy shrank
Since 2003, some market activity allowed

18. Command Economies Today
Impact of Command Economies
In theory, command systems fair to everyone; In practice, many disadvantages
central planners do not understand local conditions
workers have little motivation to be productive or conserve resources
artificially low prices lead to shortages
people sacrificed to carry out centrally planned policies

19. Reviewing Key Concepts
Write a brief paragraph explaining the links between the following three terms:
centrally planned economy
socialism
communism

20. Fundamentals of a Market Economy
Market Economies
Fundamentals of a Market Economy
KEY CONCEPTS
Private property rights—right to own businesses and resources
Property means material objects, money, intellectual property, labor
Market—place or situation where people buy and sell goods, services

21. Fundamentals of a Market Economy
FEATURE 1: Private Property and Markets
Private property rights must be defined and protected by law
Buyers must be sure sellers have right to sell products they offer
Sellers must be sure they will be paid for their products

22. Fundamentals of a Market Economy
FEATURE 2: Limited Government Involvement
Laissez faire—government should not interfere in economy
Capitalism—system having private ownership of factors of production
says producers will create products consumers demand
Actual market economies all have some government involvement

23. Fundamentals of a Market Economy
FEATURE 3: Voluntary Exchange in Markets
Voluntary exchange—traders believe they get more than they give up
In market economy, most trade is exchange of product for money
Profit—financial gain from business transaction

24. Fundamentals of a Market Economy
FEATURE 4: Competition and Consumer Sovereignty
Competition—sellers’ efforts to get business by offering best deal
Consumer sovereignty—buyers choose products, control what is produced
Competition controls self-interested behavior
sellers offer low price or high value to please consumers, make profit

25. Fundamentals of a Market Economy
FEATURE 5: Specialization and Markets
Specialization—people concentrate their efforts in the activities they do best
encourages efficient use of resources
leads to higher-quality, lower-priced products

26. Circular Flow in Market Economies
KEY CONCEPTS
Circular flow model illustrates how interactions occur in a market
Represents the two key decision makers: households, businesses
Shows the two markets where households and businesses meet
goods and services
resources

27. Circular Flow in Market Economies
Product Markets
Product market—market where goods and services bought and sold
includes all purchases by individuals from businesses

28. Circular Flow in Market Economies
Factor Markets
Factor market—market for the factors of production
land, labor, capital, entrepreneurship
Individuals own all factors of production
own some outright, such as labor; some indirectly, such as stocks
individuals are producers; businesses are customers

29. Circular Flow in Market Economies
Circular flow model shows how market economies operate
outside arrow shows flow of money
inside arrow shows flow of resources and products

30. Impact of Market Economies
KEY CONCEPTS
Late 1940s to early 1990s, many countries had command systems
U.S.S.R., Eastern Europe, China, much of SE Asia, Cuba, North Korea
Most of these countries have now adopted market systems
remaining communist countries using some market measures

31. Impact of Market Economies
Advantages
Individuals free to make economic choices, pursue own work interests
Less government control means political freedom, less bureaucracy
Locally made decisions mean better use of resources, productivity
Profit motive ensures resources used efficiently, rewards hard work
resulting competition leads to higher-quality, more diverse products

32. Impact of Market Economies
Disadvantages
Pure market economy has no way to provide public goods and services
Does not give security to sick or aged
During U.S. industrial boom, business owners rich, workers low pay
Businesses did not address problems caused by industrialization
Industrialized societies adopt some government control of economy

33. Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
private property rights and market
laissez faire and capitalism
specialization and profit
factor market and product market

34. Today’s Mixed Economies
Modern Economies in a Global Age
Today’s Mixed Economies
KEY CONCEPTS
Mixed economy has elements of traditional, command, market systems
most common type of economic system
Traditional, command, market economies adopt elements from others

35. Today’s Mixed Economies
Life in a Mixed Economy
Family farming in U.S. serves as example of mixed economy
traditional: all members of family help bring in harvest
command: affected by government—public school, roads, Social Security
market: own land, sell their products in competitive market

36. Today’s Mixed Economies
Types of Mixed Economies
Most economies emphasize one type; U.S. basically has market system
Many European countries greater mix of market and command elements
France—government controls some industries; provides social services
Sweden—state owns part of all companies; lifelong benefits, high taxes
Namibia—traditional; state supports market, foreign investment

37. Trends in Modern Economies
KEY CONCEPTS
Economies change in response to natural, social, political changes
East European economies changed after fall of communism

38. Trends in Modern Economies
TREND 1: Changes in Ownership
Economies in transition often go through changes in ownership
To nationalize is to change from private to government ownership
To privatize is to change from government to private ownership

39. Trends in Modern Economies
TREND 2: Increasing Global Ties
Growth of global economy—economic actions across national boundaries
recent agreements open up world markets to trade among countries
fast, safe, cheap transport of resources, products eases distribution
phone, computer links make financial transactions quick, inexpensive
cross-border business partnerships lower research, production costs

40. Reviewing Key Concepts
Write a sentence that illustrates the meaning of each of the following terms:
mixed economy
Nationalize
Privatize
global economy

41. Case Study: Contrasting Economies: North Korea and South Korea
Background
Korea was a single country until end of World War II
North Korea has communist government, command economy
South Korea is democracy with market economy
What’s the Issue?
How effective are command and market economies?
Thinking Economically
Based on documents A and C, in which country does the government appear to be more involved in controlling business and the economy?
Based on documents A and C, what can you infer about the effects of government activities on productivity in the two nations?
In today’s global economy, is a command economy or a market economy more likely to succeed? Support your answer with information presented in the three documents.